The Secret Behind Costco

By Jessica Kim

In the stingy world of retail, it is not surprising to hear of labor unrest and strikes that arise from unhappy workers demanding higher pay and better benefits. However, Costco Wholesale, the second largest retail company in the U.S. following Walmart, has yet to experience any noteworthy labor disputes during its thirty year span.

Over the last five years, Costco has experienced an unrivaled growth in sales of 39 percent and a doubling of stock prices since 2009. This streak continued even through the retirement of highly revered co-founder and Chief Executive Officer Jim Sinegal. Since the announcement and takeover of new CEO Craig Jelinek, stock prices are up 30 percent.

Even during these difficult times, Costco pays its hourly workers an average of $20.89 an hour, which does not include overtime. According to Bloomberg Businessweek, Costco sent a letter in April to activist Ralph Nader revealing that eighty-eight percent of its employees have company-sponsored health insurance and workers with coverage pay premiums that are less than 10 percent the overall cost of their plans.

Jelinek sent a public letter to Congress, according to Bloomberg, urging an increase in the federal minimum wage for the first time since 2009. Though Congress did not take up on the offer, the letter shed light on Costco’s culture and philosophy while simultaneously distinguishing itself from its retail counterparts.

Costco does not have a public-relations committee. Instead, Craig Jelinek himself conducts interviews with journalists, something that is unheard of at major corporations. After the interview, Costco Chief Financial Officer Richard Galanti calls in to inquire and patch up any mistakes the CEO might have accidently made. This reflects Costco’s “no-frills” style.

Each Costco warehouse stocks over 4,000 different products and marks almost everything up 14 percent or less over cost. After factoring in real estate costs and wages, the company barely makes profit from its products. Instead, eighty percent of its gross profit comes from its membership fee of $55 per month.

The secret behind Costco’s unbeatable prices is in its buying and selling on a massive scale to receive bulk discounts from its suppliers. By offering the lowest prices in the market, much online market competition is cut out since perusing online won’t find you better prices than in-store shopping at Costco.

According to Bloomberg, many companies such as Costco that are paying close attention to the overall happiness of their employees are performing successfully. Companies such as Nordstrom, Sephora, and Whole Foods Market which are known for treating their employees well, have reported higher profits.

Even in the midst of the 2009 economic downturn, Sinegal approved a $1.50-an-hour wage increase for hourly employees, instead of resorting to layoffs and wage cuts like other major retail brands. This decision cost an extra $20 million for the company but when asked why Costco pays their workers so well, Galanti answered to CFO.com, “Because it’s the right thing to do.”

Costco’s future looks bright as Jelinek is planning a possible partnership with luxury brands such as Coach, Ralph Lauren, and Louis Vuitton. Jelinek plans to expand Costco’s international market as well, and is set to open new stores in France and Spain within the next two years. Over the next five years, Jelinek plans to rapidly expand Costco’s market presence in Japan, Taiwan and South Korea.

However, a possible glitch that can be seen in Costco’s bright future is in its lack of online presence that is exacerbated by a recent shift in retail buying habits. More consumers are purchasing online and Costco lacks the online popularity that distinguish its physical stores. Costco Chairman Jeff Brotman assures Bloomberg that their website has been improving and that they have recently shifted their website platform from one hosted by Microsoft to one run by IBM.

Another concern for this company is in its aging executive team, most of whom are nearing 60. The issue of succession is arising for the team and they have recently discussed a program to welcome the next wave of company leaders from within, as they do not hire business school graduates.

When asked for his outlook of future American business practices, Jelinek told Bloomberg that he doubts there will be a dramatic shift in the way businesses treat their employees in the near future but assured that, “As long as you continue to take care of the customer, take care of employees, and keep your expenses in line, good things are going to happen to you.”